vinod1

Purely based on psychology I think there is much less likelihood of a crisis at the big banks in US 1. Penualtimate preparedness as Peter Lynch calls it. Preparing for the last crisis that we did not see coming. Never again seems to be the motto of many investors to be blindsided by such financial shocks. 2. Think about bank regulators and bank examiners at the individual banks. At least at the bank I work, I know we have swung to the other extreme in terms of awareness and attitude to risk. It is perfectly understandable of course. Think of the incentives for a bank examiner. Anything that blows up after he has examined that bank would reflect very badly on him and his career just after taking so much critique for not doing a good job in a crisis a couple of years back. Same goes for many senior managements. 3. Banks essentially seem to embody the sum of all fears for investors. They have a very valid reason of course to be fearful. I would be much more worried about things that no one is worried about. If so many people are worried about something and especially people high up who are in power are also worried about it, I sleep much more peacefully about such risks. Vinod

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They have a 3 month trial subscription for $75. You get 13 segments, one each week that covers 1700 stocks. You also get online access where you can download all the pdf's for the 1700 stocks (using a download browser utility). I get this once every couple of years. For me it is definitely worth it. The first thing I do when researching a stock is to look up the Valueline pdf so it comes in pretty handy. Also going through the 1700 stocks one at a time gives you a very good sense of the majority of the large cap and mid cap stocks in US. Also it allowed me to short list about 200 stocks that pass a first screen of quality criteria that I plan to keep an eye on and develop a competency in. If you just want to look at how a valueline report looks like they have free reports for the Dow 30 stocks on their website. Vinod

Bass makes an incredibly compelling case for that (among other things) in this video I just got done watching. Shorting Japanese insurers that hold a lot of government bonds is something I am exploring. http://www.youtube.com/watch?feature=player_embedded&v=WWgtzwqWh60 i read that the japanese own 95% of their own debt. seems like it's in stable hands and not leveraged. also japan can print money and monetize the debt if need be. if bass gets this one right he should run for King of the World. He would get elected. To summarize Bass: Problem is not only existing debt but going forward. Japanese savings rate has been coming down from around 15% range to barely above 0%. So in future their debt had to be funded from external sources. Their debt to govt revenues is around 20. At a wtd average debt cost of 1% interest expense is taking up 25% of govt revenues. If debt costs rise by 1-2% you can do the math. Picture aint pretty. Vinod

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I do not think Japan resembles Europe in any way. 1. Japan has a trade surplus - except for a few months here and there. 2. Japan has an independent currency and a central bank willing to print if needed. One of the above has to change for Japan to be dependent foreign debt. Vinod

Packer, How do you view your investment when holding a LEAP vs a stock? Say you have a 5% of portfolio allocated to a LEAP which might be say equal to a 20% nominal portfolio exposure to that investment, do you think of it as having invested 20% of your portfolio or do you just view it as a 5% allocation? Although it depends on the attractiveness of the opportunity, do you limit your LEAP allocation to a certain percentage of your total portfolio? I would think a 50% allocation of portfolio to LEAP would introduce a very high degree time sensitivity to the portfolio. I recently moved towards making most of my investments via LEAP balanced with a very high cash percentage and just wanted to get your thoughts as you seem to have a similar approach. Thanks Vinod

China can hold all the gold in the world but it is not going to give confidence to people to trust it as the reserve currency. If they become democratic and they develop the whole set of checks and balances across the various branches of government, then sure after a few decades of stability they have a chance. I have a tough time imagining any dictator or drug lord hoarding their wealth in Yuan in the next several decades. Vinod

That might be the best of the bad options but do not see that as a painless solution for Germany. Exports constitute 1/3 of German GDP and if it exits the Euro its currency is going to soar relative to many of the countries in Europe. That could be a pretty significant hit to its economy and this would be occurring at the same time as a major economic upheaval across the globe as a result of such a disruptive event. Vinod

What does socialism got to do with this? If every country in Europe had their own currency, the problem would have been very manageable, first by sharply curtailing much of the debt buildup and then by making both monetary and fiscal measures available to policy makers. Vinod

:) I just started digging into JPM as well. Had enough exposure to C and BAC. Vinod

In mid 2007 we had this as well, TED was elevated, CDS were going up but equity market ignored all this and kept going up. This might be rear view mirror thinking but I cannot help thinking how close the parallel is between the two. Hopefully, we have an equally wonderful volatility this time. Vinod

I do not think Governments are going to make up for the reduction in leverage. I see the exact opposite via curbs on various fees and limitations on proprietary trading. ROE = ROA x Financial Leverage I think ROA is going to be lower than in the past - not just of the immediate past of 2000-2007 but also of 1990 onwards. This is due to a variety of factors: limitations on fees, limitations on many types of trading activity, elevated loan losses as consumer deleverages, etc. Financial leverage is going down for sure from something like 15 to a 10. So the net effect should be much lower ROE for banks and I do not see any Govt help on the horizon that mitigates this. This is coming from a guy who has a portfolio dominated by banks. The flip side of reduced leverage is that it should result in much lower risk to the banks. This should feed into lower debt costs (which should add a modest amount to earnings) and hold your breath, higher earnings multiple or book value multiple. I do not base my investment case on higher earnings multiple but that is what I would think would happen if banks really end up with the capital ratios that are being talked about with Basel 3 and SIFI buffers. Vinod

Thanks for highlighting this book. I bought the book as soon as I saw your post since this is a topic that has occupied a lot of my time in my previous incarnation as a EMH devotee. This book goes into a lot of the theory behind returns starting from first principles and is remarkably unbiased between EMH and Behavioral or Ben Graham style arguments. It is basically a text book reflecting the latest finance research findings on all topics related to estimating expected returns and provides both a rational and behavioral (inefficient market) arguments. Overall I really liked the book. I doubt it would be of interest to most investors here on this board. If you are following Ben Graham it just gives you the underlying finance theory behind investing. Vinod

Uccmal, I have invested in BAC 2013 calls as well and planning to sell these and buy the 2014 options. I am assuming this would trigger the wash sale rule. Is there such a things as "rolling over" into 2014 options or some other way to avoid the wash sale rule in this case? Thanks Vinod

Anyone find it ironic that the European agreement tries to do two things 1. Ensure that a 50% haircut on the Greek bonds is not a "default" and thus render CDS from being paid. 2. Provide an insurance cover on sovereign debt that pays if there is a "default". I am hoping a Mel Brooks movie comes out on this Euro drama. Vinod

1. The only concrete thing that has been achieved is to take a disorderly greek default off the table. That is the good news. Now we have to see which of the European financials are swimming naked i.e. who cannot take a 50% haircut on Greek debt and stay solvent. 2. There is no agreement on how much EFSF would be leveraged. Two general solutions agreed upon are (a) Making available insurance on new sovereign debt. They dont have the capability for complete protection so we have to see what % of the losses would be covered by this and which countries debt would be guarenteed. (b) Vague refrence to private/public paternership. I dont know which private investor would participate in this. Overall I dont see much of substance that has been achieved with respect to how contagion would be contained beyond Greece. I am unimpressed with the recapitalization plan of their banks ($150 billion) as well. I am surprised that the market reacted so positively to such a small step. The policy statement is an entertaining read however: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/125644.pdf "All other euro area Member States solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms." Vinod

Thank you! Just ordered this book but seems to have been written in 1975. Vinod

Security Analysis and Business Valuation on WallStreet - Hooke. This is a pretty good book that lays out the valuation for stocks in general and then specifically covers a few industries that differ from the general technique like banks, P&C, Oil and Gas. I bought the 1st edition but recently a second edition has been released. This book can be considered as the next level after Pat Dorsey's book. Vinod

Mungerville, I am following you comments with much interest as it seems to be somewhat in line with my own thinking. If I may restate or summarize you point as below, would you agree? Most of the time it makes sense to ignore the macro because it is really difficult for one person to be able to assess with any degree of confidence how the economy and stock markets would fare. However, there are few occasions, very few and far between maybe once or twice in an investor's lifetime where it does make sense to pay attention to macro. These could be for example, extremes of valuation (say using Shiller's PE) or some other form of excess (say very high leverage among companies, consumers, governments). In these few cases it would make sense to take this into account and position once's portfolio appropriately - higher levels of cash, active hedges, etc. We take these precautions not because we predict or know something is going to happen, but because we learned from history that such occassions have led to severe losses. We fully understand that such precaution would necessarily penalize returns if such a risk does not actually materalize. Vinod

There are quite a bit of differences with Japan so I agree with you point. This leads to one more way for margins to come down. Employment compensation to go up even in a weak economic environment. Outsourcing has enabled companies to cut down on compensation via moving some of the work offshore to lower labor cost locations. As wages increase in those lower cost locations (directly impacting margins) or backlash aganst oursourcing limits or even reverses the outsourcing trend it could cut down on the profit margins. Vinod

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I have doubts about Parsad's point about higher interest rates changing margins. Look at Japan, even with super low interest rates their margins are at very low levels. Higher interest rates would allow many companies to earn higher margins via greater returns on their cash and investments. Although companies on a net basis have debt so overall costs should increase with higher rates, but not sure if that is really the critical element supporting margins. Vinod

You are right they should be feeling poor right now, but many homeowners still have expectations (or hope) that their home values would recover. It might take a few more years of low prices along with sustained high unemployment to change behavior. Vinod